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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from        to         

 

Commission File No. 000-51754

 

 

CROCS, INC.

(Exact name of registrant as specified in its charter)

 

 

7477 East Dry Creek Parkway, Niwot, Colorado 80503

(Address, including zip code, of registrant’s principal executive offices)

 

(303) 848-7000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

 

As of July 27, 2015, Crocs, Inc. had 74,684,613 shares of its $0.001 par value common stock outstanding.

 

 

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Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends, our future expectations and other matters that do not relate strictly to historical facts and are based on certain assumptions of our management. These statements, which express management’s current views concerning future events or results, use words like “anticipate,” “assume,” “ believe,” “continue,” “estimate,” “expect,” “future,” “intend,” “plan,” “project,” “strive,” and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will,” “would” and similar expressions or variations. Forward-looking statements are subject to risks, uncertainties and other factors which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, those described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2014 and subsequent filings with the Securities and Exchange Commission. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

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Crocs, Inc.

Form 10-Q

For the Quarterly Period Ended June 30, 2015

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PART I — Financial Information
Item 1.	Financial Statements (Unaudited)		1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014		1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2015 and 2014		2
	Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014		3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		38
Item 4.	Controls and Procedures		40
PART II — Other Information
Item 1.	Legal Proceedings		41
Item 1A.	Risk Factors		42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		42
Item 6.	Exhibits		43
Signatures			44

 

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PART I — Financial Information

 

ITEM 1. Financial Statements

 

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

($ thousands, except per share data)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Revenues		$	345,671		$	376,920		$	607,864		$	689,349
Cost of sales		155,801			172,320			290,624			328,522
Restructuring charges (Note 6)		—			2,029			—			2,029
Gross profit		189,870			202,571			317,240			358,798
Selling, general and administrative expenses		168,636			153,370			294,705			290,525
Restructuring charges (Note 6)		2,810			4,060			6,473			6,310
Asset impairment charges (Note 2)		2,075			3,230			2,075			3,230
Income from operations		16,349			41,911			13,987			58,733
Foreign currency transaction gain (loss), net		(217		)	(220		)	277			(2,988		)
Interest income		196			403			484			880
Interest expense		(260		)	(128		)	(479		)	(319		)
Other income (loss), net		(80		)	30			(411		)	171
Income before income taxes		15,988			41,996			13,858			56,477
Income tax expense		(2,562		)	(18,719		)	(2,857		)	(24,076		)
Net income		$	13,426		$	23,277		$	11,001		$	32,401
Dividends on Series A convertible preferred stock (Note 13)		(3,000		)	(3,033		)	(5,833		)	(5,166		)
Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature (Note 13)		(736		)	(721		)	(1,457		)	(1,339		)
Net income attributable to common stockholders		$	9,690		$	19,523		$	3,711		$	25,896
Net income per common share (Note 12):
Basic		$	0.11		$	0.19		$	0.04		$	0.26
Diluted		$	0.11		$	0.19		$	0.04		$	0.25

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

($ thousands)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Net income		$	13,426		$	23,277		$	11,001		$	32,401
Other comprehensive income (loss):
Foreign currency translation gain (loss), net		6,297			221			(17,567		)	(759		)
Total comprehensive income (loss)		$	19,723		$	23,498		$	(6,566	)	$	31,642

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

($ thousands, except number of shares)

 

		June 30,			December 31,
		2015			2014
ASSETS
Current assets:
Cash and cash equivalents		$	197,279		$	267,512
Accounts receivable, net of allowances of $42,694 and $32,392, respectively		172,762			101,217
Inventories (Note 3)		182,626			171,012
Deferred tax assets, net		3,951			4,190
Income tax receivable		15,443			9,332
Other receivables		12,069			11,989
Prepaid expenses and other assets		33,308			30,156
Total current assets		617,438			595,408
Property and equipment, net (Note 2, 7)		59,501			68,288
Intangible assets, net		90,336			97,337
Goodwill		2,227			2,044
Deferred tax assets, net		17,687			17,886
Other assets		23,259			25,968
Total assets		$	810,448		$	806,931
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	84,510		$	42,923
Accrued expenses and other liabilities (Note 5)		98,206			80,216
Deferred tax liabilities, net		11,726			11,869
Accrued restructuring (Note 6)		3,719			4,511
Income taxes payable		10,389			9,078
Current portion of long-term borrowings and capital lease obligations		5,350			5,288
Total current liabilities		213,900			153,885
Long-term income tax payable		4,172			8,843
Long-term borrowings and capital lease obligations		3,691			6,381
Long-term accrued restructuring (Note 6)		216			348
Other liabilities		11,209			12,277
Total liabilities		233,188			181,734
Commitments and contingencies (Note 14)
Series A convertible preferred stock, par value $0.001 per share, 1,000,000 shares authorized, 200,000 shares issued and outstanding, redemption amount and liquidation preference of $203,000 and $203,067 as of June 30, 2015 and December 31, 2014, respectively (Note 13)		174,136			172,679
Stockholders’ equity:
Preferred stock, par value $0.001 per share, 4,000,000 shares authorized, none outstanding		—			—
Common stock, par value $0.001 per share, 250,000,000 shares authorized, 92,505,166 and 75,845,884 shares issued and outstanding, respectively, as of June 30, 2015 and 92,325,201 and 78,516,566 shares issued and outstanding, respectively, as of December 31, 2014		93			92
Treasury stock, at cost, 17,059,282 and 13,808,635 shares as of June 30, 2015 and December 31, 2014, respectively		(241,324		)	(200,424		)
Additional paid-in capital		351,094			345,732
Retained earnings		329,180			325,470
Accumulated other comprehensive loss		(35,919		)	(18,352		)
Total stockholders’ equity		403,124			452,518
Total liabilities, commitments and contingencies and stockholders’ equity		$	810,448		$	806,931

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ thousands)

 

		Six Months Ended June 30,
		2015			2014
Cash flows from operating activities:
Net income		$	11,001		$	32,401
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,108			20,751
Unrealized gain on foreign exchange, net		(180		)	(10,892		)
Asset impairment charges		2,075			3,230
Provision for doubtful accounts, net		6,220			3,867
Share-based compensation		6,492			8,331
Inventory write-down charges		—			2,029
Other non-cash items		163			732
Changes in operating assets and liabilities:
Accounts receivable, net of allowances		(80,201		)	(94,840		)
Inventories		(15,862		)	(30,769		)
Prepaid expenses and other assets		(3,347		)	(563		)
Accounts payable		43,383			34,015
Accrued expenses and other liabilities		18,926			7,760
Accrued restructuring		(804		)	3,839
Income taxes		(10,025		)	3,130
Cash used in operating activities		(3,051		)	(16,979		)
Cash flows from investing activities:
Cash paid for purchases of property and equipment		(4,176		)	(11,376		)
Proceeds from disposal of property and equipment		—			43
Cash paid for intangible assets		(5,496		)	(18,944		)
Change in restricted cash		531			(788		)
Cash used in investing activities		(9,141		)	(31,065		)
Cash flows from financing activities:
Proceeds from preferred stock offering, net of issuance costs of $0.0 million and $15.8 million, respectively		—			182,220
Dividends - Series A preferred stock		(5,900		)	(2,134		)
Repayment of bank borrowings and capital lease obligations		(2,630		)	(2,372		)
Deferred debt issuance costs		(57		)	—
Issuances of common stock		959			1,209
Purchase of treasury stock		(42,727		)	(47,005		)
Repurchase of common stock for tax withholding		(261		)	(787		)
Cash provided by (used in) financing activities		(50,616		)	131,131
Effect of exchange rate changes on cash		(7,425		)	8,722
Net increase (decrease) in cash and cash equivalents		(70,233		)	91,809
Cash and cash equivalents - beginning of period		267,512			317,144
Cash and cash equivalents - end of period		$	197,279		$	408,953
Supplemental disclosure of cash flow information - cash paid during the period for:
Interest, net of capitalized interest		$	479		$	204
Income taxes		$	13,371		$	23,174
Supplemental disclosure of non-cash investing and financing activities:
Accrued purchases of property and equipment		$	460		$	3,577
Accrued purchases of intangibles		$	78		$	8,667
Accrued dividends		$	3,000		$	3,033
Accretion of dividend equivalents		$	1,457		$	1,339

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              ORGANIZATION & BASIS OF PRESENTATION

 

Organization

 

Crocs, Inc. and its subsidiaries (collectively the “Company,” “we,” “our” or “us”) are engaged in the design, development, manufacturing, marketing and distribution of footwear, apparel and accessories for men, women and children.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. The condensed consolidated balance sheet as of December 31, 2014 was derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”) but does not contain all information required for complete financial statements. The accompanying unaudited condensed consolidated financial statements and these notes thereto should be read in conjunction with the 2014 Form 10-K. In the opinion of management, these condensed consolidated financial statements reflect all adjustments (consisting solely of normal recurring matters) considered necessary for a fair statement of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

 

Reclassifications

 

Certain prior period amounts on the condensed consolidated financial statements have been reclassified to conform to current period presentation. We segregated certain restructuring charges recorded to selling, general and administrative expense on the condensed consolidated statements of operations during the three and six months ended June 30, 2014 to the restructuring charges line item. These reclassifications had no effect on income from operations, current liabilities or cash used in operating activities.

 

Recently Issued Accounting Pronouncements

 

Debt Issuance Costs

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03: Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU requires retrospective adoption and will be effective for us beginning in our first quarter of 2016. Early adoption is permitted. We do not expect that this pronouncement will have a material impact on our condensed consolidated financial statements.

 

Share-Based Payments

 

On June 19, 2014, the FASB issued ASU 2014-12 in response to the EITF consensus on Issue 13-D. The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. The ASU does not contain any new disclosure requirements. This ASU is effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015. We do not expect that this pronouncement will have a material impact on our condensed consolidated financial statements.

 

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Revenue Recognition

 

In May 2014, the FASB issued their final standard on revenue from contracts with customers. The standard, issued as ASU No. 2014-09: Revenue from Contracts with Customers (Topic 606) by the FASB, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In applying the revenue model to contracts within its scope, an entity:

 

· Identifies the contract(s) with a customer (Step 1)

· Identifies the performance obligations in the contract (Step 2)

· Determines the transaction price (Step 3)

· Allocates the transaction price to the performance obligations in the contract (Step 4)

· Recognizes revenue when (or as) the entity satisfies a performance obligation (Step 5)

 

The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. Certain of the ASU’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (e.g., sales of property, plant, and equipment, real estate or intangible assets). Existing accounting guidance applicable to these transfers has been amended or superseded. Compared with current GAAP, the ASU also requires significantly expanded disclosures about revenue recognition. On July 9, 2015, the FASB deferred the effective date to reporting periods (including interim periods) beginning after December 15, 2017. Early application is permitted for reporting periods (including interim periods) beginning after December 15, 2016. We are currently evaluating the impact that this pronouncement will have on our condensed consolidated financial statements.

 

Inventory

 

In July 2015, the FASB issued ASU No. 2015-11: Simplifying the Measurement of Inventory, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under existing standards, the market amount requires consideration of replacement cost, net realizable value (“NRV”), and NRV less an approximately normal profit margin. The new ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. This standard is effective prospectively beginning January 1, 2017, with early adoption permitted. The Company is currently assessing this ASU’s impacts on Crocs’ consolidated results of operations and financial condition.

 

Other new pronouncements issued but not effective until after June 30, 2015 are not expected to have a material impact on our financial position, results of operations or cash flows.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Earnings per Share

 

Basic and diluted earnings per common share (“EPS”) is presented using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividend rights and participation rights in undistributed earnings. Under the two-class method, EPS is computed by dividing the sum of distributed and undistributed earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. A participating security is a security that may participate in undistributed earnings with common stock had those earnings been distributed in any form. Our Series A convertible preferred stock (“Series A preferred stock”) issued in 2014 represents participating securities as holders of the Series A preferred stock are entitled to receive any and all dividends declared or paid on common stock on an as-converted basis. In addition, shares of our non-vested restricted stock and restricted stock unit awards are considered participating securities as they represent unvested share-based payment awards containing non-forfeitable rights to dividends. As such, these participating securities must be included in the computation of EPS pursuant to the two-class method on a pro-rata, as-converted basis. Diluted EPS reflects the potential dilution from securities that could share in our earnings. In addition, the dilutive effect of each participating security is calculated using the more dilutive of the two-class method described above. This method assumes that the securities remain in their current form, or the if-converted method, which assumes conversion to common stock as of the beginning of the reporting date. Anti-dilutive securities are excluded from diluted EPS. See Note 12—Earnings Per Share for further discussion.

 

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Asset Impairments

 

We periodically evaluate all of our long-lived assets for impairment when events or circumstances would indicate the carrying value of a long-lived asset may not be fully recoverable. The following table summarizes retail asset impairment charges by reportable operating segment for the three and six months ended June 30, 2015 and 2014 related to certain underperforming stores that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over the remaining economic life of those assets:

 

		Three Months Ended June 30,										Six Months Ended June 30,
		2015					2014					2015					2014
		Impairment Charge			Number of Stores		Impairment Charge			Number of Stores		Impairment Charge			Number of Stores		Impairment Charge			Number of Stores
		(in thousands, except store count data)
Americas		$	686		4		$	1,247		16		$	686		4		$	1,247		16
Asia Pacific		515			8		444			12		515			8		444			12
Europe		874			7		1,539			9		874			7		1,539			9
Total asset impairment		$	2,075		19		$	3,230		37		$	2,075		19		$	3,230		37

 

Depreciation

 

During the three months ended June 30, 2015 and 2014, we recorded $4.3 million and $6.3 million, respectively, in depreciation expense of which $0.4 million and $0.4 million, respectively, was recorded in ‘Cost of sales,’ with the remaining amounts recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statements of operations. During the six months ended June 30, 2015 and 2014, we recorded $9.0 million and $11.7 million, respectively, in depreciation expense of which $1.0 million and $0.9 million, respectively, was recorded in ‘Cost of sales,’ with the remaining amounts recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statements of operations. As of June 30, 2015 and December 31, 2014, accumulated depreciation was $109.9 million and $99.8 million, respectively.

 

3. INVENTORIES

 

The following table summarizes inventories by major classification as of June 30, 2015 and December 31, 2014:

 

		June 30,			December 31,
		2015			2014
		(in thousands)
Finished goods		$	176,742		$	167,515
Work-in-progress		386			703
Raw materials		5,498			2,794
Total inventories		$	182,626		$	171,012

 

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4. GOODWILL & INTANGIBLE ASSETS

 

The following table summarizes the goodwill and identifiable intangible assets as of June 30, 2015 and December 31, 2014:

 

		June 30, 2015									December 31, 2014
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
		(in thousands)
Capitalized software		$	165,277	(1)	$	(76,883	)(2)	$	88,394		$	157,615	(1)	$	(62,591	)(2)	$	95,024
Customer relationships		5,053			(5,053		)	—			5,945			(5,798		)	147
Patents, copyrights, and trademarks		6,594			(4,959		)	1,635			6,702			(4,931		)	1,771
Core technology		4,170			(4,170		)	—			4,170			(4,170		)	—
Other		350			(350		)	—			698			(636		)	62
Total finite lived intangible assets		181,444			(91,415		)	90,029			175,130			(78,126		)	97,004
Indefinite lived intangible assets		307			—			307			333			—			333
Goodwill (3)		2,227			—			2,227			2,044			—			2,044
Goodwill and intangible assets		$	183,978		$	(91,415	)	$	92,563		$	177,507		$	(78,126	)	$	99,381

 

(1)         Includes $4.1 million of software held under a capital lease classified as capitalized software as of June 30, 2015 and December 31, 2014, respectively.

 

(2)         Includes $2.8 million and $2.5 million of accumulated amortization of software held under a capital lease as of June 30, 2015 and December 31, 2014, respectively, and is amortized using the straight-line method over the useful life.

 

(3)         Change in goodwill relates entirely to foreign currency translation.

 

The following table summarizes estimated future annual amortization of intangible assets as of June 30, 2015:

 

		Amortization
Fiscal years ending December 31,		(in thousands)
2015 (remainder of year)		$	9,957
2016		18,329
2017		16,608
2018		14,153
2019		12,232
Thereafter		18,750
Total		$	90,029

 

During the three months ended June 30, 2015 and 2014, amortization expense recorded for intangible assets with finite lives was $5.1 million, of which $1.6 million and $1.8 million, respectively, was recorded in ‘Cost of sales,’ with the remaining amounts recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statements of operations. During the six months ended June 30, 2015 and 2014, amortization expense recorded for intangible assets with finite lives was $10.1 million and $9.1 million, respectively, of which $3.0 million and $3.1 million, respectively, was recorded in ‘Cost of sales,’ with the remaining amounts recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statements of operations. As of June 30, 2015 and December 31, 2014, accumulated amortization was $91.4 million and $78.1 million, respectively.

 

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5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

The following table summarizes accrued expenses and other current liabilities as of June 30, 2015 and December 31, 2014:

 

		June 30,			December 31,
		2015			2014
		(in thousands)
Accrued compensation and benefits		$	25,481		$	23,824
Professional services		19,947			16,212
Fulfillment, freight and duties		15,179			12,110
Sales/use and VAT tax payable		10,644			5,897
Accrued rent and occupancy		8,761			9,675
Deferred revenue and royalties payable		4,535			2,005
Customer deposits		4,080			3,075
Dividend payable		3,000			3,067
Accrued legal liabilities		2,540			2,150
Other (1)		4,039			2,201
Total accrued expenses and other current liabilities		$	98,206		$	80,216

 

(1)         The amounts in ‘Other’ consist of various accrued expenses and no individual item accounted for more than 5% of the total balance as of June 30, 2015 or December 31, 2014.

 

6. RESTRUCTURING ACTIVITIES

 

Restructuring

 

On July 21, 2014, we announced strategic plans for long-term improvement and growth of the business. These plans comprise four key initiatives including (1) streamlining the global product and marketing portfolio, (2) reducing direct investment in smaller geographic markets, (3) creating a more efficient organizational structure by reducing excess overhead and enhancing the decision making process, and (4) closing or converting approximately 75 to 100 retail locations around the world. The initial effects of these plans were incurred in 2014 and are continuing throughout 2015. We recorded restructuring charges of $2.8 million and $6.5 million and closed 7 and 16 stores, as identified in the initial restructuring plan, during the three and six month periods ended June 30, 2015, respectively. During 2015, we currently estimate restructuring costs related to store closures and changes in organizational structure of approximately $10 million to $15 million, but we can make no assurance that actual costs will not differ, as our restructuring plans are not yet complete.

 

The following table summarizes our restructuring activity during the three and six months ended June 30, 2015 and 2014:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
		(in thousands)
Severance costs		$	1,899		$	2,869		$	3,956		$	4,453
Lease / contract exit and related costs		518			572			1,934			1,178
Other (1)		393			2,648			583			2,708
Total restructuring charges		$	2,810		$	6,089		$	6,473		$	8,339

 

(1)         The amounts in ‘Other’ consist of various asset and inventory impairment charges prompted by the aforementioned restructuring plan, legal fees and facility maintenance fees.

 

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The following table summarizes our restructuring activity during the three and six months ended June 30, 2015 and 2014 by reportable segment:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
		(in thousands)
Americas		$	—		$	1,224		$	456		$	1,224
Asia Pacific		1,266			393			3,040			393
Europe		384			307			1,524			982
Corporate		1,160			4,165			1,453			5,740
Total restructuring charges		$	2,810		$	6,089		$	6,473		$	8,339

 

The following table summarizes our accrued restructuring balance and associated activity from December 31, 2014 through June 30, 2015:

 

		December 31, 2014			Additions			Cash Payments			June 30, 2015
		(in thousands)
Severance		$	3,154		$	3,956		$	(4,279	)	$	2,831
Lease/ contract exit and related costs		1,401			1,934			(2,677		)	658
Other (1)		304			583			(441		)	446
Total restructuring charges		$	4,859		$	6,473		$	(7,397	)	$	3,935

 

(1) Includes expenses related to exiting stores and legal fees.

 

Retail Store Closings

 

As mentioned above, the Company plans to close additional retail locations around the globe. As such, we expect to incur certain exit costs specific to store closures including operating lease termination costs, rent obligations for leased facilities, net of expected sublease income, and other expenses in association with this plan. During the three and six month periods ended June 30, 2015, we closed 7 and 16 company-operated retail locations that were identified in the initial restructuring plan, respectively. These locations were selected for closure by management based on historical and projected profitability levels, relocation plans, and other factors. As of June 30, 2015 and December 31, 2014, we had a liability of approximately $3.9 million and $4.9 million, respectively, related to locations to be closed and other reductions in workforce in accrued restructuring on the condensed consolidated balance sheets. The calculation of accrued store closing reserves primarily includes future minimum lease payments from the date of closure to the end of the remaining lease term, net of contractual or estimated sublease income. We record the liability at fair value in the period the store is closed.

 

7. FAIR VALUE MEASUREMENTS

 

Recurring Fair Value Measurements

 

As of June 30, 2015 and December 31, 2014, our Level 1 assets subject to fair value measurements consisted solely of cash equivalents of $7.6 million and $23.3 million, respectively.

 

Non-Recurring Fair Value Measurements

 

The majority of our non-financial instruments, which include inventories, property and equipment and intangible assets, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur such that a non-financial instrument is required to be evaluated for impairment and the carrying value is not recoverable, the carrying value would be adjusted to the lower of its cost or fair value and an impairment charge would be recorded. During both the three and six months ended June 30, 2015 and 2014, we recorded $2.1 million and $3.2 million, respectively, in impairment charges associated with the Company’s retail locations.

 

8. DERIVATIVE FINANCIAL INSTRUMENTS

 

We transact business in various foreign countries and are therefore exposed to foreign currency exchange rate risk inherent in revenues, costs, and monetary assets and liabilities denominated in non-functional currencies. We have entered into foreign currency

 

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exchange forward contract and currency swap derivative instruments to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities, and of future cash flows caused by changes in foreign currency exchange rates. We do not designate these derivative instruments as hedging instruments under the accounting standards for derivatives and hedging. Accordingly, these instruments are recorded at fair value as a derivative asset or liability on the balance sheet with their corresponding change in fair value recognized in ‘Foreign currency transaction gain (loss), net’ in our condensed consolidated statements of operations. For purposes of the cash flow statement, we classify the cash flows at settlement from undesignated instruments in the same category as the cash flows from the related hedged items, generally within ‘Cash provided by operating activities.’

 

The following table summarizes the notional amounts of the outstanding foreign currency exchange contracts as of June 30, 2015 and December 31, 2014. The notional amounts of the derivative financial instruments shown below are denominated in their U.S. Dollar equivalents and represent the amount of all contracts of the foreign currency specified. These notional values do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the foreign currency exchange risks.

 

		June 30,			December 31,
		2015			2014
		(in thousands)
Foreign currency exchange forward contracts by currency:
Japanese Yen		$	85,763		$	44,533
Singapore Dollar		56,542			61,887
British Pound Sterling		23,260			17,230
Euro		11,342			134,755
South Korean Won		10,697			14,590
Mexican Peso		8,036			13,180
South African Rand		6,616			4,355
Australian Dollar		5,245			7,913
Indian Rupee		4,905			3,356
New Taiwan Dollar		2,907			3,229
Swedish Krona		2,701			1,918
Canadian Dollar		2,452			3,005
Russian Ruble		2,210			1,838
Brazilian Real		974			—
New Zealand Dollar		642			743
Hong Kong Dollar		626			814
Chinese Yuan Renminbi		—			5,376
Norwegian Krone		—			917
Total notional value, net		$	224,918		$	319,639
Latest maturity date		July 2015			January 2015

 

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The following table presents the amounts affecting the condensed consolidated statements of operations from derivative instruments and exposure from day-to-day business transactions in various foreign currencies for the three and six months ended June 30, 2015 and 2014:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
		(in thousands)
Foreign currency activity		$	(1,597	)	$	3,150		$	4,620		$	2,220
Derivatives not designated as hedging instruments:
Foreign currency exchange forwards		1,380			(3,370		)	(4,343		)	(5,208		)
Foreign currency transaction gain (loss), net		$	(217	)	$	(220	)	$	277		$	(2,988	)

 

The line ‘Foreign currency transaction gain (loss), net’ on the condensed consolidated statements of operations includes both realized and unrealized gains/losses from underlying foreign currency activity and derivative contracts. These gains and losses are reported on a net basis.

 

9. REVOLVING CREDIT FACILITY & BANK BORROWINGS

 

Revolving Credit Facility

 

On September 25, 2009, we entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with the lenders named therein and PNC Bank, National Association (“PNC”), as a lender and administrative agent for the lenders.

 

On April 2, 2015, we entered into the Sixth Amendment to Amended and Restated Credit Agreement (the “Sixth Amendment”) pursuant to which certain terms of the Credit Agreement were amended. The Sixth Amendment primarily amended certain definitions of the financial covenants to be more favorable to us including (i) setting the minimum fixed charge coverage ratio to 1.00 to 1.00 through December 31, 2015, 1.15 to 1.00 through March 31, 2016 and 1.25 to 1.00 for each quarter thereafter, (ii) setting the Leverage Ratio to 4.00 to 1.00 through March 31, 2016 and 3.75 to 1.00 for each quarter thereafter and (iii) reducing our global cash requirement from $100 million to $50 million.

 

The Credit Agreement enables us to borrow up to $100.0 million, with the ability to increase commitments to $125.0 million subject to certain conditions, and is currently set to mature in December 2017. The Credit Agreement is available for working capital, capital expenditures, permitted acquisitions, reimbursement of drawings under letters of credit, and permitted dividends, distributions, purchases, redemptions and retirements of equity interests. Borrowings under the Credit Agreement are secured by all of our assets including all receivables, equipment, general intangibles, inventory, investment property, subsidiary stock and intellectual property. Borrowings under the Credit Agreement bear interest at a variable rate. For domestic rate loans, the interest rate is equal to the highest of (i) the daily federal funds open rate as quoted by ICAP North America, Inc. plus 0.5%, (ii) PNC’s prime rate and (iii) a daily LIBOR rate plus 1.0%, in each case there is an additional margin ranging from 0.25% to 1.00% based on certain conditions. For LIBOR rate loans, the interest rate is equal to a LIBOR rate plus a margin ranging from 1.25% to 2.00% based on certain conditions. The Credit Agreement requires monthly interest payments with respect to domestic rate loans and at the end of each interest period with respect to LIBOR rate loans. The Credit Agreement further provides for a limit on the issuance of letters of credit to a maximum of $20.0 million. The Credit Agreement contains provisions requiring us to maintain compliance with certain restrictive and financial covenants.

 

As of June 30, 2015 and December 31, 2014, we had no outstanding borrowings under the Credit Agreement. As of June 30, 2015 and December 31, 2014, we had outstanding letters of credit of $1.7 million and $1.8 million, respectively, which were reserved against the borrowing base under the terms of the Credit Agreement. As of June 30, 2015, we were in compliance with all restrictive financial and other covenants under the Credit Agreement.

 

Long-Term Bank Borrowings

 

On December 10, 2012, we entered into a Master Installment Payment Agreement (“Master IPA”) with PNC in which PNC financed the Company’s recent implementation of a new enterprise resource planning (“ERP”) system, which began in October 2012 and was substantially completed in early 2015. The terms of each note payable, under the Master IPA, consist of a fixed interest rate and payment terms based on the amount borrowed and the timing of activity throughout the implementation of the ERP system. The

 

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Master IPA is subject to cross-default, cross-termination, and is co-terminous with the Credit Agreement. We are in compliance with the covenants under the Credit Agreement.

 

As of June 30, 2015 and December 31, 2014, we had $9.0 million and $11.6 million, respectively, of debt outstanding under five separate notes payable, of which $5.3 million represents current installments for both periods. As of June 30, 2015, the notes bear interest rates ranging from 2.45% to 2.79% and maturities ranging from September 2016 to September 2017. As this debt arrangement relates solely to the construction and implementation of an ERP system for use by the entity, interest expense was capitalized to the condensed consolidated balance sheets until the assets were placed into service on January 1, 2015. During the six months ended June 30, 2015, no interest was capitalized. During the three and six months ended June 30, 2014, we capitalized $0.1 million and $0.2 million in interest expense related to this debt arrangement to the condensed consolidated balance sheets. Interest rates and payment terms are subject to changes as further financing occurs under the Master IPA.

 

The components of our consolidated debt and capital lease obligations are as follows:

 

		June 30, 2015					Carrying Value
		Weighted Average		Unused Borrowing			June 30,			December 31,
		Interest Rate		Capacity			2015			2014
				(in thousands)
Debt obligations
Revolving credit facility		LIBOR plus 1.25% - 2.00%		$	100,000		$	—		$	—
Bank borrowings		2.63%		—			9,028			11,646
Total debt obligations				100,000			9,028			11,646
Capital lease obligations							13			23
Total debt and capital lease obligations							$	9,041		$	11,669
Current maturities							$	5,350		$	5,288
Long-term debt and capital lease obligations							$	3,691		$	6,381

 

The maturities of our debt obligations as of June 30, 2015 are presented below:

 

		June 30, 2015
		(in thousands)
Maturities of debt obligations
2015 (remainder of year)		$	2,663
2016		4,769
2017		1,609
Thereafter		—
Total debt maturities		$	9,041
Current portion		$	5,350
Noncurrent portion		$	3,691

 

As of June 30, 2015 and December 31, 2014, the fair value of our debt instruments approximates their reported carrying amounts.

 

10. STOCK-BASED COMPENSATION

 

Stock-based compensation expense is based on the grant date fair value and is recognized on a straight-line basis over the applicable vesting period. During the three months ended June 30, 2015 and 2014, we recorded $3.5 million and $3.8 million, respectively, of pre-tax stock-based compensation expense, of which $3.3 million and $3.6 million, respectively, is included in selling, general and administrative expenses, and $0.2 million for both periods is included in cost of sales on the condensed consolidated statements of operations. During the three months ended June 30, 2015 and 2014, we capitalized $0.0 million and $0.1 million, respectively, as intangible assets on the condensed consolidated balance sheets related to the implementation of our ERP system.

 

During the six months ended June 30, 2015 and 2014, we recorded $6.5 million and $8.5 million, respectively, of pre-tax stock-based compensation expense, of which $6.2 million and $8.1 million, respectively, is included in selling, general and administrative expenses, and $0.3 million and $0.4 million, respectively, is included in cost of sales on the condensed consolidated statements of

 

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operations. During the six months ended June 30, 2015 and 2014, we capitalized $0.0 million and $0.2 million, respectively, as intangible assets on the condensed consolidated balance sheets related to the implementation of our ERP system.

 

Stock Option Activity

 

A summary of our stock option activity as of and for the three and six months ended June 30, 2015 is presented below:

 

		Stock Options		Weighted Average Exercise Price
Outstanding as of March 31, 2015		1,593,228		$	13.51
Granted		35,000		$	13.52
Exercised		(89,127	)	$	8.81
Forfeited or expired		(43,163	)	$	21.73
Outstanding as of June 30, 2015		1,495,938		$	13.55

 

		Stock Options		Weighted Average Exercise Price
Outstanding as of December 31, 2014		1,696,130		$	13.52
Granted		35,000		$	13.52
Exercised		(146,338	)	$	6.56
Forfeited or expired		(88,854	)	$	24.35
Outstanding as of June 30, 2015		1,495,938		$	13.55

 

As of June 30, 2015, there was $1.0 million of unrecognized compensation expense related to stock options. The expense is expected to be amortized over a weighted average period of 2.83 years.

 

Restricted Stock Awards and Units Activity

 

A summary of our RSA and RSU activity as of and for the three and six months ended June 30, 2015 is presented below:

 

		Restricted Stock		Weighted Average			Restricted Stock		Weighted Average
		Awards		Grant Date			Units		Grant Date
		(“RSAs”)		Fair Value			(“RSUs”)		Fair Value
Unvested at March 31, 2015		2,494		$	15.04		3,323,605		$	10.83
Granted		15,987		$	15.01		226,042		$	9.71
Vested		(2,494	)	$	15.04		(43,287	)	$	16.52
Forfeited or expired		—		$	—		(118,807	)	$	12.65
Unvested at June 30, 2015		15,987		$	15.01		3,387,553		$	11.20

 

		Restricted Stock		Weighted Average			Restricted Stock		Weighted Average
		Awards		Grant Date			Units		Grant Date
		(“RSAs”)		Fair Value			(“RSUs”)		Fair Value
Unvested at December 31, 2014		7,488		$	15.61		1,997,471		$	15.78
Granted		15,987		$	15.01		2,543,476		$	10.17
Vested		(7,488	)	$	15.61		(433,528	)	$	16.41
Forfeited or expired		—		$	—		(719,866	)	$	22.52
Unvested at June 30, 2015		15,987		$	15.01		3,387,553		$	11.20

 

The total grant date fair value of RSAs vested during the three months ended June 30, 2015 and 2014 was $0.0 million and $0.7 million, respectively. The total grant date fair value of RSAs vested during the six months ended June 30, 2015 and 2014 was $0.1

 

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